Summary
- We see payments volume acceleration in 2020, as total addressable market remains strong.
- Interchange likely going up, putting upward pressure on network pricing.
- Free cash flows should lead to more buybacks and deals in 2020.
Basic Business/Product Analysis
Mastercard (NYSE:MA) is a network that facilitates electronic fund transfers via branded credit, debit, and gift cards. MA is one of the world's best-recognized brands, operating across nearly all countries around the world and commanding more than 60% of the global payments volume share together with its main rival Visa (NYSE:V). Unlike Visa, Mastercard derives more than 70% of total revenue from international markets (Visa is more around 50% US/50% international).
Valuation
There is a meaningful growth opportunity that we continue to expect from the Mastercard story, particularly from the untapped international developed markets, such as Europe and the BRIC nations. When we compare MA against its key competitors in the payments space (not only Visa, Discover Financial Services (NYSE:DFS), and American Express Company (NYSE:AXP) networks, but also Global Payments Inc. (NYSE:GPN), Alliance Data Systems Corporation (NYSE:ADS), PayPal (NASDAQ:PYPL), The Western Union Company (NYSE:WU), FleetCor Technologies, Inc. (NYSE:FLT), among others), we see the company meriting at least 38x P/E multiple on our 2020 EPS estimate of $8.98, yielding the target price of $345.
Story Remains Attractive for 2020
Payments volume acceleration in 2020: Per our model, we expect the payments volume to accelerate in the following markets: United States (by about 70-80 bps), Canada, France, Germany, Brazil, India, and Japan, among others. In our view, credit growth has not yet saturated in the developing world and even in Western Europe, while the debit growth - arguably, one of the strongest levers in non-US markets - continues to grow in upper single digits/low teens.
Market remains strong: Per latest Nilson data, card penetration stands at only 21% in Western Europe and at less than 15% in developing markets. On average, every year, 0.9% of paper (cash and checks) users convert to plastic (credit card, debit card, gift card) in the US, and approximately 0.65% convert in the European corridor (we note that data for developing markets is more murky). As a result, we expect solid double-digit growth in payments volume to continue. Since their respective IPOs in 2006 and 2008, Mastercard and Visa delivered very strong share performance largely due to meaningful growth in payments volume.
Interchange likely going up, putting upward pressure on network pricing: As we conduct our channel checks across major banks, we note that the interchange (tied to the merchant discount rate and charged by issuing banks) continues to go up, with the average increase of 5-7 bps in 2019 alone, particularly for credit, which, in our view, should result in a slight increase in network pricing. We believe that over the next four quarters, we may see as much as half-a-basis point increase in pricing.
